Since approximately 2010, the arrival of shale oil on the global market has altered geopolitical power scales as well as the price of the commodity. Shale has been extracted in the last decade from fields in North America such as Permian Basin in Texas, Bakken in North Dakota and Marcellus in the northeast United Sates. In March 2016, American shale accounted for half of all U.S. oil production and produced 4.3 million barrels per day. The emergence of shale is a significant reason, if not the preeminent reason, that the price of oil dropped from $140 per barrel in 2008 (and over $100 per barrel as recently as 2014) to around $50 per barrel today. All of this is often referred to as “the Shale Revolution.”

Shale oil production in the Permian Basin. (Spencer Platt/Getty Images)

As the price of oil dropped from its pre-2015 numbers, the costs to shale producers dropped as well. At the time, many proclaimed that the breakeven point had come down enough to make shale profitable in a changing market. Many claimed this was primarily due to better technology. Shale oil companies were still good investments, they said, even at low oil prices.

Recently, however, industry experts and economists have begun to offer other, more plausible, explanations. Some experts, such as Art Berman, have explained that the lower costs were largely due to lower labor costs in a depressed market as well as desperate vendors giving discounts. In addition, shale producers lower their costs by capping wells and delaying rigs in less economical environments, such as North Dakota, and focusing solely on the best prospects, primarily in Texas. But even Texas shale operations have suffered during this price downturn.

It appears that most of the drop in the breakeven point for shale was not due to technology or newly-discovered efficiencies in the last couple of years. Compared to most offshore or conventional drilling, shale oil production is still a service-heavy industry. And those service costs (and payroll costs) seem to be falling and rising in line with the movement of oil prices. This would mean that when oil prices rise again, so would the costs to shale producers.

Ellen R. Wald

Based on data compiled by Dr. Anas Ahaji and Al Rajhi Capital and data sourced from EIA.

Dr. Anas Alhaji, an economist and oil industry consultant based in Texas, along with Al Rajhi Capital, compiled the breakeven points for the largest shale producers between 2014 and the start of 2017. When placed alongside a graph of the spot price of WTI oil from the end of three quarters prior, it appears the breakeven points for shale are actually a function of the past price of oil itself. This indicates that because shale costs are not fixed or even stable, the industry will likely struggle to achieve consistent profit unless the labor market and vendor markets are transformed. Essentially, shale should struggle to achieve sustained profitability, no matter the price of oil.